Beware VAT costs on farm accommodation, rural accountants warn

Andrew Vickery

Farmers who are converting redundant farm buildings or providing accommodation for employees could face steep VAT bills, according to accountant Old Mill.

New Permitted Development rules, which should benefit the rural sector by simplifying the planning process, unfortunately carry unforeseen tax implications, says head of rural services Andrew Vickery. “Under the new rules, planning consent is not required for, say, conversion of redundant outbuildings into residential accommodation. However, to secure VAT relief, planning consent must have been granted – without it the relief is technically not available.”

This means that landowners using Permitted Development rights cannot claim back VAT incurred on materials under the DIY self-build scheme. “Furthermore, zero-rating will not apply to any onward disposal of the building, which could result in significant VAT costs,” says Mr Vickery.

Reduced rating, whereby VAT is levied at 5% rather than 20%, should still be available for conversion work, which will reduce the level of exposure in many instances, he adds. “But unforeseen VAT costs will still arise where properties are ostensibly being developed for private occupation or onward sale.”

Old Mill has raised the issue with HMRC, requesting that planning consent be automatically granted under the legislation, thereby satisfying the DIY self-build scheme and zero-rating conditions. “We’re awaiting a response,” says Mr Vickery. “Meanwhile, it may be worth seeking formal planning consent, even where it is no longer required, simply to protect your VAT position.”

The firm has also tackled HMRC over VAT charges on workers’ dwellings. “Often, farmers provide accommodation for employees free of charge, in which case any VAT incurred on property upkeep costs can be reclaimed in full,” says Mr Vickery. “However, many people charge a nominal rent to ensure Assured Shorthold Tenancy legislation applies, so that they retain the right to terminate the tenancy if necessary. And that’s when problems arise.”

The charging of rent constitutes an exempt supply, which means VAT incurred on property costs is restricted, and can only be attributed to the nominal rent. “This is a particular problem when substantial works have been undertaken to make the property fit for habitation by the employee,” says Mr Vickery. “Furthermore, as such properties are often the subject of agricultural restrictions, the zero and reduced rates for construction work may not apply either.”

Farmers providing accommodation to employees should therefore think carefully before charging rent, he warns. “It’s vital to take specialist advice to ensure you’re aware of potential pitfalls and how to avoid them.”